Tax Incentives; Searching for a “Golden Ticket”

There’s been a flurry of news lately on corporate tax incentives. These programs reduce or abate taxes private companies should pay in exchange for some economic development project in a region. In recent weeks there’s been articles about eclectic vehicle facilities, chip manufacturers, stadiums, and casinos (we recently covered plans for a new football stadium in Buffalo, NY and a casino in Chicago).

It’s not uncommon for states to push these programs following a recession, but now they often seem like requirements for any corporate relocation. In 2011, Connecticut created the “First Five Job Creation Initiative” — and then kept extending the program.

Things seemed to reach a tipping point in 2017 when Amazon launched its HQ2 search, asking governments for tax incentives as it looked where to invest. For all the proposals it received, Amazon chose already booming areas: New York City (later dropped), the Washington, DC metro area, and Nashville, TN. The choices were greeted by wide-spread backlash.

Amazon HQ2 in Virginia Rendering. Source: Architectural Digest

But the tide is turning. While city and states will continue to lure companies with incentives, increased pressure is being put on curtailing this form of corporate welfare. This week we’ll look at some recent economic incentive news and trends.

IN FOCUS

Tax Incentives in the News

• West Virginia taxpayers will pay a profitable steelmaker $1.7 billion for jobs during tightest labor market in decades MarketWatch
• As lawmakers approve bill to lure $4B megadeal, Kansas officials set to make pitch to mystery company Topeka Capital-Journal
• Ohio incentives for Intel’s Licking County chip plant will top $2B, including $600M ‘onshoring grant’ The Columbus Dispatch
• US states lavish subsidies on carmakers for edge in EV race Financial Times

The Push to Curtail Corporate Tax Incentives

• Opinion: States use tax incentives to lure companies. Bipartisan support is growing to stop it. Washington Post
• Bill to give tax breaks to carbon capture facilities runs into opposition KMTV Nebraska
• NY lawmakers slam $10 billion public subsidies, tax breaks for corporations NY Post

Studies and Resources

• State Tax Incentive Evaluations Database NCSL
• Five economic development takeaways from the Amazon HQ2 bids Brookings
• Illuminating the Hidden Costs of State Tax Incentives Tax Foundation
• Subsidy Tracker Good Jobs First

CHART OF THE WEEK

Tax incentives are not likely going away, but they should be better evaluated. The Pew Charitable Trusts advocates for different ways states can evaluate these incentives — if they do at all. And from the private sector, McKinsey & Co. wrote about looking at the costs of the program related to job retention.

A 2019 report by New Jersey Policy Perspective found the state “is a national outlier in both the size of its corporate subsidy awards and how little the state receives as a return on its investments.” It advocates for targeting investment in industries and areas, coupled with some evaluation framework.

Source: NJ Policy Perspective

There have been a number of economic incentive calamities:

• Foxconn: “Wisconsin’s top economic development official, who recently renegotiated a $2.85 billion incentive package with Foxconn down to $80 million, says the episode helped cause the state to rethink its approach to business subsidies.” CNBC News
• Texas Ch. 313: “a major problem with Chapter 313 is that the payments from companies to school districts lie outside of the traditional school finance system, which requires wealthier districts to share some of their bounty with poorer ones. The state can’t redistribute excess funds from 313 agreements to districts more in need of money.” The Texas Tribune
• 38 Studios: The story of 38 Studios, how in Rhode Island re-located a video game company run by a former Red Sox Pitcher to the state. Story in The New York Times (2013).

There’s no such thing as a “golden ticket.” This is especially true when it comes to tax incentives and public subsidies for private companies. Too often, these deals are made in the hopes of creating jobs and stimulating the economy, but often don’t live up to long-term expectations.

Working to better evaluate these programs, targeting incentives, and continually analyze their effectiveness is needed.

INTERESTING READS

Evaluating State and Local Business Tax Incentives NBER Pubs

• The Issue: What are the trade-offs for state tax subsidies and do they stimulate economic activity?
• Key Finding:

Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job.

While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.

If you liked this post from Back of the Budget, please share and follow me on Twitter @WhatTimTweets. Any opinions expressed herein are those of the author and the author alone. This segment was originally published Feb. 14, 2022.